Summary:
Meghnad Desai (LSE) argues that high price of oil is due a speculative bubble, not related to supply and demand. No macro-economic factors to explain sharp rise in prices. Index and pension funds treating oil as an asset rather than commodity, with no intention of using it. Market not driven by supply and demand but simply by price expectations. Needs to be made less profitable in order to discourage this. Up to Group of Eight leading industrialised nations leaders to urge Nymex to implement this policy. (Published: 05/06/08)
Notes:
- latest price rise has baffled many: what has happened to supply and demand to cause such a steep and sudden price rise?
- Gordon Brown: "the cause is clear: growing demand and too little supply"
- China and India are buying more oil.
- Costs of exploration and extraction are going up.
- Nigeria and Venezuela are causing anxieties about supply.
- But: none of this is new
- Nothing has happened in the real oil economy to justify such a sharp and steep rise in its price.
- latest sharp upsurge in the price of oil most likely a speculative bubble rather than an outcome of market fundamentals
- Soros: commodity index funds treating oil as an asset rather than a commodity to be bought and sold for use, thus creating a bubble
- index funds and pension funds are investing in oil futures, not for direct use but as financial assets for profit
- index funds and pension funds are neither buying oil nor selling it: they are passive investors in commodities
- have invested $260bn (C169bn, GBP133bn) in commodity markets, compared with $13bn just five years ago. Much of this money is in oil.
- this paper market is not driven by the pressures on demand and supply but entirely by price expectations
- global economy is likely to be forced into a serious crisis if we do not explore the possibility that this is a bubble that needs to be burst quickly
- best way to counter speculation is to make it less profitable.
- protect the regular traders in the real oil economy
- ie. those who intend to close their positions by making or taking delivery of oil)
- charge them a lower margin than those who have no intention of plying the oil trade
- purely financial traders must be made to pay a proper price for their speculation
- can be done simply by increasing the margin that they have to put down to trade as open interest, from the current 7 per cent to about 50 per cent
- up to the Group of Eight leading industrialised nations leaders to urge Nymex to implement this policy
- no need for western governments to go down on their knees to Arab oil sheikhs, or to ration oil to the increasingly cash-strapped and angry consumers
